The mood in the mortgage industry these days is gloomy, and rightfully so. Originations in 1994 were down more than 25% from 1993, and quarter-to- quarter declines are approaching 50%. Industry profitability is declining, and some mortgage bankers would like to sell to a deeper-pocketed company.

However, the declining fortunes of the mortgage banking industry are lowering the value of mortgage companies, especially origination networks, enough to render such sales increasingly difficult. At least one mortgage company, Household Mortgage Services, has simply shut down its origination network without even attempting to attract bids.

The industry is haunted by parallels to the mortgage market of 1987-89, when the last refi boom collapsed in the face of higher interest rates that led to a recession and left many mortgage companies less profitable or smaller, or even forced them out of business altogether.

Even Household's recent announcement that it would stop originating home loans without trying to find a buyer for its loan production operations is reminiscent of mortgage origination networks that were shut down in 1988-89 because they could not be sold at any price or even be given away.

However, amid the gloom enveloping the industry, there are three harbingers of hope, which should be noted in the context of these historical parallels: the current market for mortgages shows a high percentage of ARM loans; the yield curve is beginning to flatten; and Fleet Financial recently announced plans to repurchase shares of Fleet Mortgage that it had sold to the public three years ago.

The first and second harbingers reinforce each other if we continue historical memory into 1990. Volume in the post-refi-wave environment of 1987-89 was heavily ARM, as it is now. In 1990, the yield curve flattened, and fixed mortgage rates began to decline again to levels that were attractive to customers.

Also, ARM customers, whose teaser rates were ratcheting up, desired the security and predictability of fixed rates. At that point, a refi wavelet began as the ARM customers of the 1987-89 period began to refinance their ARMs into the newly affordable fixed-rate mortgages.

The recent flattening of the yield curve suggest that something similar may end the current shrinkage in the mortgage market. ARMs' share of total mortgage originations has risen to approximately 50% in the third-highest origination year on record and shows no sign of abating. This means that there are again a number of ARMs out there ready to be refinanced into fixed-rate mortgages once ARMs begin to reprice and fixed rates decline from their current levels.

But are we anywhere near such a decline? While the general course of interest rates is impossible to predict, the flattening yield curve suggests that lower fixed rates may be closer than is generally supposed. Fleet, a large and savvy financial institution, is signaling that it will pay for control of mortgage capacity. History also suggests that any refi wavelet will come with little warning, just as the refi wavelet of 1990-91 caught the industry by surprise.

What can lenders do now to take advantage of this ray of hope once it converts from hope to actual application volume? A mortgage lender can take several steps now to position itself to take advantage of this coming wavelet and outflank the competition.

1. Prepare marketing materials, in prototype, targeted at ARM borrowers who will be experiencing "rate shock" and who are candidates to refi into lower fixed-rate loans.

2. Keep the sales apparatus in tune to attract potential customers and make the initial customer contact easy and rewarding.

3. Perhaps most importantly, now is the time to look at the lender's whole origination process with an eye toward streamlining it and making it as customer-friendly as possible so that the lender and the customer avoid backlogs, delays, redundancies, and burnout.

When customers start coming in the door again, the last thing they we want to do is chase them right back out with bureaucracy, excessive paperwork, and poor service. Instead, the goal is to accommodate customers with fast, efficient service that meets their needs while providing the lender with a fair profit. Mr. Neagle is managing consultant at EDS Management, which is based in Rosemont, Ill.

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